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Consensus Income Distribution
Author(s) -
Stark Oded,
Falniowski Fryderyk,
Jakubek Marcin
Publication year - 2017
Publication title -
review of income and wealth
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.024
H-Index - 57
eISSN - 1475-4991
pISSN - 0034-6586
DOI - 10.1111/roiw.12291
Subject(s) - economics , social welfare function , social planner , redistribution of income and wealth , redistribution (election) , income distribution , welfare , econometrics , distribution (mathematics) , population , income elasticity of demand , inequality , economic inequality , microeconomics , mathematics , public good , demography , sociology , politics , political science , law , market economy , mathematical analysis
In determining the optimal redistribution of a given population's income, we ask which factor is more important: the social planner's aversion to inequality, embedded in an isoelastic social welfare function indexed by a parameter alpha, or the individuals' concern at having a low relative income, indexed by a parameter beta in a utility function that is a convex combination of (absolute) income and low relative income. Assuming that the redistribution comes at a cost (because only a fraction of a taxed income can be transferred), we find that there exists a critical level of beta below which different isoelastic social planners choose different optimal allocations of incomes. However, if beta is above that critical level, all isoelastic social planners choose the same allocation of incomes because they then find that an equal distribution of incomes maximizes social welfare regardless of the magnitude of alpha.